61 West 23 rd Street, 5 th Floor New York, NY 10010 tel: (212) 228-1328! Eli Broverman Chief Operating Officer eli@betterment.com May 12, 2015 Re: Due Diligence Request To Whom It May Concern: Thank you for your interest in Betterment Institutional. This Betterment Institutional diligence package is designed to help you assess our business and operations, and determine whether Betterment Institutional is appropriate for your practice. The package covers a broad number of topics requested by investment advisors who have conducted due diligence into Betterment Institutional in the past. If you have further questions after reviewing this packet, please do not hesitate to contact us. Sincerely, (Attachments) Eli Broverman
Background Betterment was founded in 2008 and has grown to now manage over $2billion for over 88,000 clients. Betterment Institutional was launched in 2014 for advisors to offer Betterment s automated platform to their clients. Betterment consists of both a broker-dealer and registered investment advisor working together. Both of these companies are wholly owned subsidiaries of Betterment Holdings, Inc. Below please find an organizational chart the Betterment entities: Investment Strategy Betterment offers clients diversified portfolios comprised solely of liquid, index-tracking, exchange-traded funds, or ETFs. Betterment does not trade individual stocks, bonds, or mutual funds. For an overview of Betterment s investment strategies and policies, please see the attached article. Trading and Allocation Procedures Client transactions are executed based on the time the instruction was received by Betterment Securities. Withdrawals (sales transactions) are generally executed within 15 minutes for orders received during market hours, subject to relevant cutoff times. For deposits (purchase transactions) Betterment Securties trades on the positions once cash is received into the Firm s bank account, generally the next day. Betterment does not trade for its own account except when necessary to fill out fractional positions for client transactions. To facilitate this, Betterment generally maintains 1-2 shares of all securities in its portfolio. Therefore, Betterment may buy or sell a fractional share position at the same time as clients. After this client transaction is completed Betterment may, if needed, buy or sell additional shares to maintain its position at 1-2 shares. No spreads are taken on any trades, and all clients receive the market execution price. 2
Betterment Institutional Fees Betterment Institutional charges 25 basis points ( bps ) on assets under management. Advisors may choose to add an additional spread to this 25 bps charge, which is billed from the client s account at the same time as the Betterment Institutional fee. Betterment does not charge any other fees for the Betterment Institutional service. The only other fees your clients will incur are the fees embedded in the funds purchased on your client s behalf; Betterment does not receive any portion of those fees. Note: Betterment charges fees in arrears as set forth in the Sub-Advisory Agreement. This includes the fee(s) attributable to your advisory fee. In the event your separate agreement with your clients provide for advance billing, it is your responsibility to determine whether you require any additional disclosures to your clients regarding fee billing or any amendments or addendums to your investment advisory agreement. Regulatory & Supervisory Matters FINRA BrokerCheck Information Public information about Betterment Securities and its membership with FINRA is available through FINRA s BrokerCheck system, available at: http://www.finra.org/investors/toolscalculators/brokercheck/ History of Regulatory Actions MTG, LLC d/b/a Betterment Securities (our broker-dealer) entered into a Letter of Acceptance, Waiver and Consent with FINRA relating to email preservation. The AWC relates to our email archiving procedures from January 2010 through May 2013; specifically, our vendor archived emails at 30 minute intervals. FINRA determined our archiving process allowed for the possibility that emails could be double deleted in between those intervals, resulting in the possibility that not all emails would be preserved. The issue has been rectified, and we now archive our emails on a continuous basis. SSAE 16 / SAS 70 / AT-601 SOC Reports and Annual Procedure Review Betterment Securities engages a PCAOB independent auditor to test and report on the firm's financials and internal control. This report may be made available upon request. Additionally, compliance and supervisory procedures are reviewed annually by the Chief Operating Officer. Independent Annual Surprise Custody Exam Betterment LLC engages a PCAOB independent auditor to conduct a surprise exam and review of the custody of client assets. The surprise exam are is completed on an annual basis. A copy of the summary of the independent audit will be made available upon request. 3
Execution Review Procedures / Best Execution Execution metrics are reviewed on a weekly basis for all transactions for purposes of evaluating compliance with best execution duties. Disaster Recovery Plan / Business Continuity Plan Both SEC and FINRA Rules require investment advisors and broker-dealers to create and maintain a business continuity plan. In accordance with these rules Betterment LLC and Betterment Securities have developed a joint plan that is intended to permit us to continue critical business operations during natural disasters, power outages or other significant events. While there can be no assurance that service will continue without interruption in all circumstances, the plans do address the actions that the firms will take in the event that there is a significant disruption. Security of assets, data preservation, and account access are top priorities, followed by other critical business operations. If there is a local disruption to the operating facilities of either firm, the business continuity plan calls for the affected firm to establish operations from an alternate location. We maintain data backup records, located well away from our primary facility so that they would not be affected by a regional disruption. We intend for account access to be available through these records should the primary data center suffer a disruption. Our plan will be reviewed, updated and tested periodically. You can read more here: https://www.betterment.com/legal/. Company Code of Ethics Betterment maintains a code of ethics that requires all officers and employees to conduct themselves with the highest standards of honest conduct and business ethics in all aspects of their activities concerning Betterment and Betterment clients. A copy of Betterment s Code of Ethics is available upon request. Custody of Assets Betterment Securities is the custodian of assets on the Betterment Institutional platform. Please see the attached article on this topic. Client Statements, and Reporting All client statements and reports are available electronically via the client s online account. These include trade confirmations, quarterly statements, and year-end tax forms. You and your clients also have access to all transactional information, including fees assessed, via the activity information page on the Betterment website. Additionally, all statements and transactional documents are available through the Betterment Securities website. Financials Independent Audited Financial Statements MTG, LLC d/b/a Betterment Securities s Statement of Financial Condition as of June 30, 2014 is available here: https://www.betterment.com/legal/brokerage-financial-statement/. 4
Other Matters Website Security Betterment uses 256-bit SSL encryption for connections between users and our servers. Additionally, all account information is encrypted and stored behind secure monitored firewalls in a secure facility that is safeguarded 24-hours-a-day. Finally, we maintain both internal and external procedures to enhance security, including internal encryption and back-ups as well as standards like automatic log-out after an extended period of time. You can read more here https://www.betterment.com/security/. Insurance Betterment accounts are SIPC protected (up to $500,000 per client) for the return of missing client property. Also, client cash is generally either reserved against or held with a FDIC participating bank when not invested on the client's behalf (up to $250,000). Note that cash is generally only held for the client during the settlement cycle for purchases and sales, as Betterment does not currently offer a cash election. Additionally, both the broker-dealer and investment advisor are covered under separate Professional Liability policies, and the firm maintains a general Cyber Liability policy. Finally, the broker-dealer entity also maintains a blanket bond as a securities dealer. For additional insurance information please refer to the response in the Custody of Assets section of this document. Privacy Policy Please see here: https://www.betterment.com/security/privacypolicy/ 5